The present invention is related generally to inflation-linked securities and, more specifically, to transaction structures for issuing inflation-linked securities.
Inflation-linked or inflation-indexed securities, such as inflation-linked bonds, are securities that protect against inflation. Such bonds are typically principal indexed or coupon linked, meaning their principal or coupon rate is linked to the change in inflation over a period of time as measured by an inflation index, such as the Consumer Price Index (CPI). In a principal-indexed bond, the principal amount increases with inflation and a fixed interest rate is applied to this increased amount. This causes the interest payment to increase over time if inflation increases. At maturity, the principal is repaid at the inflated amount. In a coupon-linked bond, the principal amount remains fixed and a variable interest rate, related to an inflation index, is applied to the principal.
Currently, issuers of inflation-linked bonds tend to be sovereign entities or private (i.e., non-governmental) companies having high credit ratings, such as utilities or financial institutions. Many other private companies are unwilling or reluctant to issue inflation-linked bonds because of unattractive accounting treatment for the swap that is used to hedge their inflation exposure on such a bond. As such, investors are not currently able to receive enhanced yield on such instruments by taking credit risk of less creditworthy issuers. Additionally, if more investors seek to protect themselves against inflation by purchasing inflation-linked securities, there may not be enough supply of inflation-linked securities to meet the demand.